Government bond prices plummeted and the yen fell as investors ditched low-risk investments to scoop up heavily oversold shares after US stocks posted record gains overnight. In a single day on Monday, global stocks added $1.7 trillion in market value, according to MSCI.

"We're seeing a wave of short-covering here, but it's hard to see how far the rebound will go," said Masayoshi Okamoto, head of dealing at Jujiya Securities in Tokyo.

After plunging 24 per cent last week, the Nikkei share average soared 12.4 per cent on Tuesday after a holiday on Monday.

Australia's S&P/ASX 200 rose 5.9 per cent after posting its biggest daily gain since October 1997 on Monday.

Fears of a looming global recession were not dead but for now the sweeping emergency steps being enacted by governments reduced the immediate risk of a worldwide financial system failure.

The US government agreed on Monday to take $25 billion stakes in several big banks in a bid to shore up the banking system and arrest the financial crisis, sources familiar with the situation said. The move follows pledges by the governments of Britain, Germany, France and other European countries of more than 1 trillion euros ($1.36 trillion) to bolster their own banks.

"Capital markets roar approval of the synchronized recapitalisation and guaranteed programmes," said Brett Williams, credit analyst with BNP Paribas in Hong Kong. "New US government initiatives rolling out this morning, in parallel with those adopted by European jurisdictions yesterday, could further underpin positive sentiment," he said in a note.

Government bonds were hard hit.

The benchmark 10-year US Treasury note fell more than a full point in price, pushing the yield up to a 2-month high of 4.05 per cent from 3.88 per cent late on Friday in New York. US bond markets were closed on Monday for a holiday but stock markets traded.

The benchmark 10-year Japanese government bond yield hit a three-month high. The benchmark 10-year JGB yield climbed 8 basis points to 1.600 per cent after striking a three-month high of 1.630 per cent in early trade.

The yen dropped against major currencies. The US dollar rose to 102.95 yen from 102 yen late on Monday in New York.

Gold rose more than 2 per cent as rising oil prices boosted its appeal as a hedge against inflation, but the rally in stock markets could also cap gains.

Gold was trading at $845.00 an ounce, up $14.20 from the New York notional close, having hit an intraday high of $847.70 an ounce. It had dropped to $821 an ounce on Monday, its weakest since Oct. 3.